The Experts

Three investing rules for 2019

Don’t panic. More money has been lost by investors doing nervous sellingin a volatile market than was ever lost by holding on until markets recovered. The problem isn’t so much the selling as leaving the investor the difficult decision about when to get back into the market.

One noted commentator announced during the GFC in 2008 that he’d sold half his portfolio but I don’t remember reading him saying at some succeeding point that now was the time to get back in. That’s a much harder decision because in some less volatile potential “buy” situations the market is either falling, in which case you tend to stand on the sidelines, or it’s climbing and you start to think you have missed out.

The ASX200 index bottomed out in February 2009 at 3344.5 points and while it’s had a lacklustre recovery over the last decade, it has lifted by more than 70%, quite independently of the dividends paid over the period.

It didn’t help in 2012 when the legendary bond market guru, Bill Gross of Pimco, announced that “the cult of the equity is dying”.

What he meant was that it was no longer correct to assume equities should trade at a lower yield than bonds because their income can grow over time, unlike that income from bonds. In other words, he was saying investors shouldn’t expect share prices and in particular p/e ratios to run as high as they had previously, but that nuance got a bit lost in the excitement.

Equities are still here.

Rule 2

Ignore all cold calls. Just this week The Australian noted that around $200 million a year is extracted from Australian investors by scammers and taken offshore. Almost every scam starts with a cold call and “boiler room” style scams run out of places like Manila are as rife as ever.

You’d think we would learn, in which case what about the Queensland financial adviser who sent most of his life savings to Lagos in Nigeria after getting one of those letters explaining he would get a massive fee for warehousing someone’s ill gotten gains? That was as long as he handed over his bank details, which he did. I like to think his folly at least took him out of the industry.

There’s a very simple test. Anyone spruiking retail financial products requires an Australian Financial Services Licence (AFSL). I got a call in 2018 from a mid- Atlantic male voice offering US shares. I told him I was a journalist and asked him whether his organisation had an AFSL, which dampened his ardour a bit. The best he could manage was “I think so” in a small voice, which told me all I needed to know. Regulator ASIC keeps open registers of all the organisations and individuals covered by AFSLs. Any spruiker who can’t quote a licence type and number to you is breaking the law.

I’d also marvel at why these people push these dodgy stocks, many of them not properly listed in the US but for instance traded on a “by appointment” basis. That’s another way of saying they are very illiquid and if you want to sell some, you have to track down a buyer yourself.

Of course, the spruikers have got the first half of the trade covered, because they find buyers by spruiking. That’s why they do it: they are not interested in how the hapless Australian buyer plans to sell the stock.

If you DO want to invest in US shares, it’s perfectly possible to do so nowadays off your own bat out of Australia if you have a trading account with a broker or as the official title has it, Market Participant. The costs are nothing like as high as they were, and such a course is entirely safe.

And if you think investing in only one stock is a bit narrow, you can buy an Exchange Traded Fund (ETF) that will give you a wider spread of stocks at what’s probably a lower cost.

Rule 3

Balance a sense of engagement with a distrust of “noise”.

During the Banking Royal Commission, one retirement saver had a panic attack and rang up his Superannuation Fund manager asking to close his account and put him into “one of those Industry Funds”. Certainly the Industry funds came out of the Commission looking better than the Retail funds but the panicking investor had failed to note he was actually in an industry fund already.

You’d have to say he was less engaged than he should have been. Very few savers can make a life’s work out of planning their retirement but it’s important to have a reasonable idea of what’s going on, most particularly if you are in a Self Managed Super Fund (SMSF). I personally find the phrase “self managed” a slight misnomer as most members should at least have an adviser as well as an accountant.

And if you react to every market rumour or investment offering, it’s very unlikely you will outperform. You are just reacting to the loudest noise, which is up there with reading Donald Trump’s tweets in terms of having a promising future.

It might be a big call to suggest you do your own research, but there’s nothing wrong with finding an advisory business or newsletter that you might “test drive” for a while before committing serious funds. There are more of them around every day and the better ones have a good bead on the needs and knowledge of their target retail investor audience.